Stock Name: KPJ
Company Name: KPJ HEALTHCARE BHD
Research House: RHB
KPJ Healthcare Bhd (June 7, RM2.97)
Upgrade to outperform at RM2.99 with higher fair value of RM3.50 (from RM3.20): There has been an increase in M&A activity in the healthcare sector recently, including Khazanah Nasional's partial general offer for Singapore-listed Parkway Holdings' shares, and the start of bidding for Australia-listed Healthscope by private equity groups and US-based healthcare companies.
Khazanah's partial offer for Parkway values the shares at FY10-FY11 PER (price-earnings ratio) of 27.2 times and 20.1 times respectively, versus 22.3 times and 16.5 times before the offer was announced (a premium of around 22%). We believe Khazanah is willing to pay a big premium to gain overall control of the company, and expand its foothold in the healthcare sector.
As for Australia-listed Healthscope, the top bid of A$1.84 billion or A$5.80/share (RM15.81) so far values the company at a CY10 PER of 17.1 times. We note that Healthscope's share price has jumped 28% since the first bid was announced on May 12. These large takeover premiums support our view that there is significant growth potential for the healthcare sector in the region.
We highlight that KPJ's FY10-FY11 PERs of 13.7 times and 12.9 times respectively are significantly lower than for Parkway, as well as other healthcare groups in Singapore, Thailand, India and Australia. Consensus estimates suggest a regional average FY10-FY11 PER of 17.9 times and 14.8 times respectively, or 31% and 15% above that of KPJ.
While KPJ is still far below the premium numbers and valuations currently commanded by Parkway, we note that KPJ is a community healthcare services provider which is in the process of expanding its geographical coverage and will also likely benefit from growth in higher-end healthcare services. The potential upside to its revenue/bed and profitability ratios is thus tremendous.
No change to our earnings forecasts for now.
The risks to KPJ's earnings include lower-than-expected patient numbers, which could be due to slower-than-expected economic recovery and serious disease outbreaks (such as SARS or swine flu) in Malaysia as well as slower-than-expected turnaround in loss-making hospitals.
Given KPJ's leading position and expansion plans in Malaysia's growing healthcare market, we believe the stock's discount valuations to regional peers should narrow. As such, we have raised our target FY10 PER to 16 times (versus 14.5 times previously based on the target PER for the consumer sector), after imputing a 10% discount to regional peers' average of 17.9 times to reflect the stock's relatively lower liquidity. Our fair value has thus been raised to RM3.50 (from RM3.20). Upgrade to outperform. ' RHB Research Institute, June 7
This article appeared in The Edge Financial Daily, June 8, 2010.
Company Name: KPJ HEALTHCARE BHD
Research House: RHB
KPJ Healthcare Bhd (June 7, RM2.97)
Upgrade to outperform at RM2.99 with higher fair value of RM3.50 (from RM3.20): There has been an increase in M&A activity in the healthcare sector recently, including Khazanah Nasional's partial general offer for Singapore-listed Parkway Holdings' shares, and the start of bidding for Australia-listed Healthscope by private equity groups and US-based healthcare companies.
Khazanah's partial offer for Parkway values the shares at FY10-FY11 PER (price-earnings ratio) of 27.2 times and 20.1 times respectively, versus 22.3 times and 16.5 times before the offer was announced (a premium of around 22%). We believe Khazanah is willing to pay a big premium to gain overall control of the company, and expand its foothold in the healthcare sector.
As for Australia-listed Healthscope, the top bid of A$1.84 billion or A$5.80/share (RM15.81) so far values the company at a CY10 PER of 17.1 times. We note that Healthscope's share price has jumped 28% since the first bid was announced on May 12. These large takeover premiums support our view that there is significant growth potential for the healthcare sector in the region.
We highlight that KPJ's FY10-FY11 PERs of 13.7 times and 12.9 times respectively are significantly lower than for Parkway, as well as other healthcare groups in Singapore, Thailand, India and Australia. Consensus estimates suggest a regional average FY10-FY11 PER of 17.9 times and 14.8 times respectively, or 31% and 15% above that of KPJ.
While KPJ is still far below the premium numbers and valuations currently commanded by Parkway, we note that KPJ is a community healthcare services provider which is in the process of expanding its geographical coverage and will also likely benefit from growth in higher-end healthcare services. The potential upside to its revenue/bed and profitability ratios is thus tremendous.
No change to our earnings forecasts for now.
The risks to KPJ's earnings include lower-than-expected patient numbers, which could be due to slower-than-expected economic recovery and serious disease outbreaks (such as SARS or swine flu) in Malaysia as well as slower-than-expected turnaround in loss-making hospitals.
Given KPJ's leading position and expansion plans in Malaysia's growing healthcare market, we believe the stock's discount valuations to regional peers should narrow. As such, we have raised our target FY10 PER to 16 times (versus 14.5 times previously based on the target PER for the consumer sector), after imputing a 10% discount to regional peers' average of 17.9 times to reflect the stock's relatively lower liquidity. Our fair value has thus been raised to RM3.50 (from RM3.20). Upgrade to outperform. ' RHB Research Institute, June 7
This article appeared in The Edge Financial Daily, June 8, 2010.
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